Almost all financial advisers recommend that individual investors avoid synchronizing the stock market. That advice can go in one ear and out the other in turbulent times, such as during last year’s coronavirus-induced panic. Professional money managers have several strategies to limit downside risk. Some of them are being sought today, as a recent reversal of interest rates has shaken investors from the stock market.
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High Valuations, Rising Interest Rates, and Fear Long-term interest rates have risen, along with fears of inflation, following the massive increase in the US money supply during the COVID-19 pandemic. This has hit the stocks of the fastest-growing companies the hardest, so far, but it makes sense because valuations for that group have expanded the most during the bull market. Here’s how future price-to-earnings ratios have increased for the S&P 500 Index SPX, -0.48% and the Nasdaq Composite Index COMP, + 0.56% over the past five years:
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Therefore, there are short-term and long-term concerns for investors who care about valuation. Investors Lack a “Strong Stomach” A disciplined investor who can weather repeated stock market downturn / rally cycles might be better served by not bothering to adopt a hedging strategy. After all, if you are making regular contributions to a 401 (k) or similar tax-deferred retirement account (hopefully your employer will match some of the contributions), you will pay lower prices during periods of decline. And even with all its swings and movements from crisis to crisis, the S&P 500’s average annual return over the past 30 years has been a neat 10.4%, according to FactSet.
Jordan Kahn, chief investment officer of ACM Funds. ACM Funds
But Kahn made a good case for the hedging strategy based on his 30 years as an investment adviser and portfolio manager: “Nine times out of 10, investors will say they have a strong stomach for risk, but inevitably, when gets into the teeth of a recession, when all the news is bad, they question themselves, sell at a very inopportune time, and then buy back at much higher prices. ”Long Stocks Kahn said the goal of the ACM Dynamic Opportunity Fund is to pursue forward growth by investing in 30 to 50 stocks of “true market leaders” while following the hedging strategy outlined above. These are the fund’s 10 largest long positions as of 31 January: Don’t Miss: If you want to get rich on marijuana stocks, you need to know the crucial difference between American and Canadian companies.